Wellington Global Homepage
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.
KEY POINTS
- Collateralized loan obligations (CLOs) have typically not been portrayed in a favorable light by the financial press, leading to several common investor misconceptions about CLOs.
- We continue to have high conviction in CLOs, but given the later stages of the current credit cycle, we are being careful and selective with regard to where we invest.
- We see compelling value in the AAA, AA, and A tranches of CLO debt (but not the BB tranche), while equity tranches look attractive for higher-return-seeking investors.
CLOS ARE PERSISTENTLY IN THE FINANCIAL HEADLINES, and most of the over-the-top articles would have you believe they are the next crisis waiting to happen. While such fearmongering may make for a good news story, we do not believe it presents a fair or accurate assessment of the actual risks that CLO investments pose — or the benefits they may offer many investors. Here we aim to debunk four common CLO-related myths that have been perpetuated by the press.
Myth #1: All CLOs are levered investments.
Facts:
- CLOs do not contain leverage or any type of borrowing. Rather, a CLO issues debt to finance the purchase of a portfolio of broadly syndicated bank loans that is actively managed by a bank loan manager. If US$500 million of debt is raised, for example, US$500 million of bank loans is purchased (less fees).
- CLO equity is a levered investment (~11x) in the underlying broadly syndicated bank loan pool, as is the BB tranche (~8x levered). CLO mezzanine and equity investors buy the most junior tranches of the CLO, thereby structurally subordinating themselves and creating a levered investment in the underlying bank loan pool. There is no borrowing involved; there are no more dollars invested in bank loans than were raised by the issuance of debt to institutional investors…
To read more, please click the download link below.
Key topics and themes
Authored by
Alyssa Irving
Fixed Income Portfolio Manager
Recommended for you
Showing
of
Insights Posts
Mid-2022 Asset Allocation & Investment Strategy Outlook
We explore the market implications of central bank policies, rising prices, and slowing growth and offer incremental steps to improving a portfolio’s return potential.
Continue reading
Article
2023-07-31
Stepping-stone investment ideas: A bridge over troubled waters?
Multi-Asset Strategist Adam Berger offers incremental investment ideas that may help asset owners improve a portfolio's return potential.
Continue reading
Quick Take
2022-10-31
Mid-2022 Global Economic Outlook
We believe heightened geopolitical uncertainty, and the new macro environment of deglobalization, higher inflation, greater global cyclicality and volatility will disrupt and drive markets.
Continue reading
Article
2023-07-31
Mid-2022 Asset Class Outlook
We offer perspectives on growth and value equities and explore ideas for shoring up your fixed income flank amid the evolving economic and market environment.
Continue reading
Article
2023-07-31
Loans from Federal Home Loan Banks: An opportunity for US insurers to enhance investment yield and total return
Learn why our Financial Reserves Management Group believes FHLB loans provide compelling potential for insurers to add alpha or increase yield by borrowing at low rates and benefitting from possible favorable treatment by ratings agencies.
Continue reading
Whitepaper
2023-07-01
Closing the return gap: A new set of “stepping stone” ideas
Multi-Asset Strategist Adam Berger offers incremental, flexible investment ideas that can be combined to help asset owners pursue their goals amid declining capital market return expectations.
Continue reading
Whitepaper
2023-06-30
Climate from the allocator's perspective
How do different asset allocators within Wellington incorporate climate change into their investment process as markets, data and regulation continue to evolve?
Continue reading
Event replay
2023-05-31
Inflation’s big comeback: Should corporate pensions care?
It’s been a long time since anyone worried about inflation getting off the ground. That seems to be changing, and for corporate plans, we think the risk is greater for return-seeking portfolios than liability-hedging portfolios. But we also believe that falling inflation is more worrisome than rising inflation. In this paper, we consider the implications and the potential role of different return-seeking allocations in preparing for various inflation outcomes.
Continue reading
Article
2022-06-30
ESG playbook for insurers: Tune out the noise
In this video interview, Insurance Multi-Asset Strategist Tim Antonelli provides a playbook for how insurers should approach ESG. Tim offers an actionable to-do list, addresses common misconceptions, and shares forward-thinking ideas to anticipate and manage risk. Tim is interviewed by Account Manager Sarah Marschok who offers color on the investment themes she is observing in the market.
Continue reading
Video
2022-06-01
Insurers: A potent plan of attack for 2021
In this video interview, Tim Antonelli offers key advice for insurers as they plan for 2021, including a robust to-do list. Tim’s role as a multi-asset insurance strategist uniquely qualifies him to offer outside-the-box ideas that can help insurers anticipate and manage risk. Tim is interviewed by Sarah Marshock, a leader on Wellington’s Financial Reserves Management Team, who offers color on the investment themes she is observing in the market.
Continue reading
Video
2022-01-31
Fighting downgrade drag to reduce pension liability lag
Even robustly constructed liability benchmarks can struggle to keep pace with the liabilities they are meant to represent, and credit-rating downgrades of issuers in the benchmark are a primary culprit. In this paper, members of our LDI Team define the problem and offer ideas to help plan sponsors and LDI managers work together to fight back.
Continue reading
Article
2021-11-30
URL References
Related Insights